We witness a decelerating inflation of 1.2% based on CPI index in Q2 2008-09 and declining growth in consumption, investment and net exports compared to Q2 2007-08. The growth rates of components of AD curve have shown sustained decline in the last few quarters. The natural rate of unemployment has risen from 5.1% to 10.2% from Q2 2007-08 to Q2 2008-09. The capacity utilization of core 8 industries has decreased from 96% to 76% Q2 2007-08 to Q2 2008-09.

What can you tell about the character of such an economy?Please use the AD, SRAS and LRAS framework to display the movement in output and inflation levels in this economy. Tell me where are you now and How far are you from the stable equilibirium?

Price level LRAS (GDP deflator, SRAS 2000 = 100) SHAS 98 B C AD, AD 0 $9.8 10.0 Real GDP (trillions of 2000 dollars)